Running thoughts on EU Apple-Ireland state aid decision

While the storm is raging in wake of the European Commission’s decision in its state aid investigation of Apple’s Irish tax structure, and while we wait for the 130 page decision documentation, here is a log of my thoughts on the issues:

1) This is historic

Before any more analytical thoughts, I must remark that this is absolutely historic. The significance is not to be understated. Although the €13bn is not formally a fine imposed on Apple, the payback order will feel like one to everyone involved. And the amount would be the largest EU fine ever.

But it’s not just the numbers. With this decision, the international tax landscape will fundamentally change. States would certainly become more cautious about granting Advance Pricing Agreements (APAs) for companies, and the normative environment for corporate tax structures would definitely change. Regulatory traction is up, tax risks are up for companies, disputes will be up. A new world indeed.

Apple’s response, as expected, is skeptical, and outlines what it thinks would be the implications:

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.

(…)

The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe.

2) The EU-US tax war is set to reach lava-like heat levels

The European Commission is doubling down on its pursuit of fair tax competition via state aid. The EU-US tax war should be extreeemely interesting after the EC decision.

When the US Treasury last week released a White Paper on state aid, it was clearly a last-gasp attempt to persuade the EC to change its stance on Apple’s Irish tax structure – or else. Repercussions were threatened, in a diplomatic manner of course.

After rumors of a payback order in the range of €0.5 to €1bn, the €13bn finding indicates that the EC in no way sought a compromise solution on their analysis – something which I had certainly expected. They are standing firm on their findings.

Although Competition Commissioner Margrethe Vestager reiterated in her press conference the strong cooperation between the EU and the US in the G20 and OECD forums on tax issues, she also remarked very clearly that, “this is an EU tax issue”, and that she was not positioned to “discuss the US tax code”.

Even so, the EC press release included a snappy retort to the US White Paper, suggesting that the US should not be complaining about the EU state aid investigation, when it could just go ahead and tax the profits themselves! A clear reference to the deferral rules that allow Apple to pile up its.

3) The EC doesn’t want Apple to pay €13bn to Ireland.

Huh? Yes, that’s correct. Sure, the EC wants €13bn paid, because its analysis finds that is the correct amount of tax outstanding. But it does not want Ireland to collect it all (which Ireland doesn’t want either).

In fact, the EC wants the €13bn distributed among the EU Member States, where Apple’s sales have been located. Also of interest is that the EC opens the door for the outstanding tax to be paid in the US (as noted above).

Both the EC press release and Vestager in her conference emphasised repeatedly – they practically pressed for it – that other EU Member States may seek for Apple’s profits to be allocated to their states, rather than to Ireland:

Furthermore, Apple’s tax structure in Europe as such, and whether profits could have been recorded in the countries where the sales effectively took place, are not issues covered by EU state aid rules. If profits were recorded in other countries this could, however, affect the amount of recovery by Ireland (see more details below).

The EC has notlooked into this issue – Vestager was also clear on this. But she was also clear the the analysis provided by the Commission could be beneficial for those ends. In other words, “EU Member States – go ahead and pursue Apple profits using our findings”. As France and others have sought for Google’s European taxes, we might soon see a surge of EU Member States pursuing a share of Apple’s European profits over the past ten years.

Update 1 (31 Aug):

4) Of course Ireland doesn’t want the €13bn

We should not be surprised that the Irish government has immediately appealed the decision. Still, many are. As one Twitter user remarked (sorry, couldn’t find the tweet again), the heavily indebted Irish government will now spend millions on lawyers and years of time to argue that the world’s deepest private pockets should not pay them €13bn.

Why? Because it would ruin the Irish economy. Or so the thinking goes. Ireland has spent years building its reputation as a highly tax competitive investment environment. And whatever you might think of the strategy, it has succeeded in some sense. Apple, Google, Facebook and a host of major global corporations have chosen to invest in Ireland – and it’s not just virtual relocation; the influx has come with plenty of local jobs as well.

If suddenly now the carpet is pulled from under a key component of this strategy (favourable tax rules), the hit to Ireland’s investment attractiveness could be considerable. The added uncertainty and the potentially negative outlook for other companies with special tax deals could mean a serious chill in foreign investment inflows. It might also speed up outright withdrawals of investment. Which in turn could hurt the real economy by making workers less productive, etc. etc.

All of this, of course, is arguable. Does the Irish economy really benefit from foreign relocations when you consider the price paid elsewhere? And is it even fair for Ireland to engage in this kind of tax competition to the detriment of other countries? But from the Irish government perspective, it is clear that maintaining the status quo is the best possible outcome.

Update 2: 3 Sep

5) Does the decision harm state sovereignty?

One of the more prevalent criticisms of the Apple state aid decision is that it harms Ireland’s sovereignty. And that the continued use of state aid rules to clamp down on national tax rulings threatens to harm sovereignty more broadly in the EU. What right does the EU have to reverse an independent, authoritative decision made by a sovereign government to agree on a certain profit allocation for a multinational company? In particular as the EU does not have competence over national direct taxes.

The sovereignty criticism activates a profound concern held by many Europeans that the EU has gone too far, has too much power, meddles too much in national affair (witness Brexit). So it’s no wonder that the state aid decision will be queried in this light.

The criticism rests on a central point: The EC has re-interpreted state aid and international tax law in order to pursue the case. If it hadn’t, it would not be able to leverage state aid rules to prosecute Apple and others. This is the central tenet of critics’ claims, even if it isn’t always recognised outright.

In response, the EC has been clear: We are not infringing national sovereignty, and we have not reinterpreted state aid or international tax law. The EC outlined its approach to tax rulings and state aid in a White Paper, arguing that state aid rules have applied to tax and transfer pricing issues for decades. No new practice, they are saying, just new cases.

In fact, the EC has been hinting that it is enforcing state sovereignty with its Apple pursuits, rather than harming it. The EC has been vocal about the fact that these are not Irish profits to tax; rather other Member States, where the products are sold, and the US, where the IP is held, are entitled to (some of) it. So Ireland has perhaps infringed the sovereignty of those countries.

Which side is right remains to be seen, as the Irish government has now appealed the state aid decision to the European Court of Justice (ECJ) General Court of the EU (thanks hselftax). There are a few possible outcomes:

If, as also the US has argued in the Treasury White Paper, the EC has extended beyond its mandate on state aid, then yes, there is clearly an infringement on sovereignty. I personally think it is unlikely that the Court(s) will find the EC guilty of outright trespassing, as there seems to be a solid basis for undertaking the investigations in the first place – but anything can happen.

Second, if the Courts rule in favour of Ireland on the basis of the substance of the case, rather than the scope of EC’s activities, it will reaffirm that EC has not infringed national sovereignty de jure, even if it may have hurt public trust in the EU institution and its acceptance of sovereignty de facto.

Finally, the Courts could rule in favour of EC, thereby confirming that EC is not infringing sovereignty and has correctly analysed the situation. I note that such an outcome would probably not defuse but spur on criticism of ‘the sovereignty-defying EU’, but in a legal sense that argument would now be wrong.

The Commission has indicated that the Apple state aid decision will be released within the new few months. Once we know more, the real scrutiny will set in…

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3 comments

Historic but maybe also a mistake of historic proportions? We now face long discussions of the legal rights and wrongs of the decision, which will wind its way through the Courts,
and maybe not just European courts but domestic ones as well.
Putting that aside we could well see this will add to the internal pressures inside the EU in terms of domestic sovereignty versus EU competence. I’m sure Brexit campaigners will cite the decision to “prove” that Governments are no longer in control of their own tax bases and administration. (Downing Street says tech giant is ‘welcome’ in Britain after Irish row – ttp://www.dailymail.co.uk/news/article-3765272/Brexit-Britain-home-giant-global-firms-fear-huge-EU-tax-demands-Apple-ruling.html#ixzz4IpCssiLV)
And it does seem remarkable that EU investigators have stepped into an area where the Irish tax authorities had already gone but have reached a diametrically opposed conclusion to the domestic authority. That surely has some wider reaching consequences for other countries if the EU can use State Aid/competition law to do this for other companies, possibly in a wide range of industries.
It is also quite ironic that the EU Press Release says “All of our work rests on the simple principle that all companies, big and small, must pay tax where they make their profits.” But this is after they have ruled Ireland requires 13bn but that this might not be the right amount if other countries want to pitch in and try to claw back some of that money! Does the Commission really believe that the Irish Government is entitled to the 13bn?

I won’t judge on whether or not the EC analysis is ‘correct’, as in in compliance with Irish and EU law, but whether this is a “mistake” is debatable. Sure, the timeline for final verdicts will be lengthy, but that should not figure in the decision to undertake such a massive case. As for supposed the sovereignty threat, I can understand that some people perceive it as such, but really that lies all in the perception. If the EC is correct, there was illegal state aid, and hence the EU is upholding EU law, not infringing Member State authority. If the EC is not correct, and there was no illegal state aid, both EU and national law will also be upheld. Some will say that the mere audacity of the EC to push a state aid case on tax law basis is a threat to Member State sovereignty on tax. But that will be for the courts to decide. On the other hand, you might equally say this is a *defense* of national sovereignty, in case the Irish tax regime has illegally undermined tax systems and fair markets in other Member States. And finally, no, the EC clearly does not think the Irish government is entitled to €13bn – it very openly believes other EU Member States are entitled to some part of that. But it also concedes that that particular issue is not within their mandate.

Thanks for the further thoughts.
As a practitioner I like to think we should, if possible, avoid long periods of uncertainty. If this takes years and years to resolve I suspect it will make tax administration more complex and perhaps less capable of making decisions. Maybe I’m too pessimistic.
I’m not sure it’s all about (incorrect) perceptions. Even if it was I’m writing from a country where I believe a lot of people (52%) voted Out partly or wholly on misperceptions. Politics is not always about policies and facts!
And it still seems a strange outcome to allot all the profits to a company in Ireland that may have been relatively small. If so, then this would seem to place all profits where the sales were administered, with nothing in the countries where goods are sold, or where R&D, design, marketing is controlled. If other countries took up the EU invitation, do we get double taxation, or a settlement to split the €13bn? Just seems a beginning, not an end to this enquiry.